Thorvald Grung Moe on the Life of Marriner Eccles and His Lasting Macroeconomic Legacy

Marriner Eccles held many pioneering views on government finance and monetary policy, and many of his ideas have relevance today.

Thorvald Grung Moe is a 30 year veteran is of the Norges Bank, the central bank of Norway, and has also worked in the Norwegian Ministry of Finance, the World Bank, and the IMF. Thorvald joins Macro Musings to talk about Marriner Eccles and a paper he has written on him title, *Marriner Eccles in the 1950 Treasury-Federal Reserve Accord: Lessons for Central Bankers.* David and Thorvald specifically discuss Eccles’ views on countercyclical monetary policy and government finance, his role in reforming and centralizing the Fed, and the many other lessons that can be learned from his life, particularly in the realm of macroeconomics.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Thorvald, welcome to the show.

Thorvald Grung Moe:  Thank you so much, David.

Beckworth:  Great to have you on. Now, you have been requested by a friend of the show, Sam Bell. Sam Bell found your paper on Marriner Eccles. And it was a great read and we'll provide a link to it in the show notes. But you've got quite the career. You've worked at the central bank of Norway for three decades. You've worked at the IMF, the Ministry of Finance in Norway. You've worked at the BIS as well. Tell us a little bit about your journey. It's a really fascinating one.

Grung Moe:  Well, thank you. I got into economics in the early 70s actually after finishing my military service. And I didn't have grades to go to the business school as my father wanted. So I started with economics and was fortunate that at the time there was a good program at the University of Oslo. You may have heard about Trygve Haavelmo who was one of the Nobel prize winners early on together with Ragnar Frisch. Yep. Frisch was dead but Haavelmo was one of my teachers. And it was a strong program in macro and econometrics. And then I wrote the thesis on development economics. So I had sort of a bit of a bias, interested in developing issues. I got my first job in the ministry of finance. But then I was called up by the World Bank and was accepted then in their young professionals program.

Grung Moe:  So I moved to the States and worked for five years at the World Bank, primarily on Africa as a country economist. And then I moved back in the mid-80s and started working in the central bank. And I actually stayed there for all those years, working on various issues ranging from monetary policy to financial stability issues primarily. I was head of the financial stability report group for a while. I was head of the governor's office of strategic planning for a short while. But ended up doing quite a bit of work on payment systems and related issues, which I know many of your guests has been into as well, the plumbing of the central banking so to speak.

Grung Moe:  But during all these years, I should correct you. I never worked for the IMF but I've been working as a consultant for them on how to organize central banks in many parts of the world. And then I retired in 2016 and has been a freelance academic since, one of the few I say because I have my pension and I don't have to search for grants. And then I'm freelancing for the IMF as well. But I continue working on these issues and as we discussed before the show, I mean, many of these issues are really old issues. And one of my favorite writers is actually Henry Thornton. And I read his credit paper money book from 1802, which is fabulous. Then you sort of figure out that these are issues that has been with us for a long time.

Beckworth:  So you have worked with actually some of our previous guests, including Peter Stella, right? You mentioned you know him from work at the IMF.

Grung Moe:  Yeah. We met initially at a mission to Azerbaijan way back. This was after the Eastern Bloc countries had started looking for advice from the IMF. And so I joined him for a mission there. And then we worked together on missions in many countries like Jordan, Palestine, Paraguay, Bolivia around the world. Peter is a good friend. And is a really good guy. I know he has been on your show as well.

Beckworth:  Yeah. And we could spend a whole show with you discussing your work on payment systems, operating systems, even talking about the Norges Bank, because it's a very fascinating central bank. It runs the pension fund, doesn't it? If I understand correctly.

Grung Moe:  Absolutely.

Beckworth:  So it does central banking and it runs the big pension fund. So once I was looking at data for central banks and I noticed how big the Norwegian central banks’ balance sheet was, had to dig deeper and parse out the part that's tied to monetary policy operations and that's tied to the sovereign wealth fund. So very fascinating there. And as we talked about before the show as well, the Norges Bank has gone to a tiered operating system kind of somewhere between a corridor and a floor system. So a lot of fascinating work happening at the Norwegian central bank. But today we're going to talk about Marriner Eccles.

Beckworth:  I do however, want to take one detour into some of your other work because you've written a lot on shadow banking. And as you know, this crisis has seen shadow banking re-emerge as an issue. Now it's not the cause of the crisis but it's been a part of the story that's happening. In particular, the Federal Reserve has stepped in in a major way with its liquidity facilities to deal with dollar funding pressures that emerged in March. So the Fed opened up all the facilities it had in the previous crisis as well as some new ones. In particular, I'm thinking of the dollar swap lines were extended to other central banks. The Fed also announced a new repo facility for foreign central banks to deposit treasuries there in addition to all the other liquidity facilities it has had.

Beckworth:  And you've written some work on shadow banking. And in fact, I think some very timely work that suggested that central banks like the Fed should be thinking carefully about how they respond and deal with shadow banking. Otherwise they're going to have to keep doing what they did in this crisis. Can you speak to that briefly?

How Central Banks Should Deal With Shadow Banking

Grung Moe:  Yes. Just let me give you a little bit of background first because this was a working paper that actually was written quite some time ago. It was revised later on. But it was some work I did while at Levy Economics Institute on sabbatical in 2011, 12. And the reason why I started working on this was twofold. One because I went to Levy to study Minsky, Hyman Minsky. He sort of spent his last years there and the institute is sort of preserving his heritage in a sense. And the person who actually got me into Minsky was Bill White at the BIS. I mentioned for you that I did some work for them in the late 90s on macroprudential policies. And while there, Bill White was into Keynes. So we discussed Keynes *Tract on Monetary Reform* and stuff like that. And then he pointed me to Minsky and his fragility hypothesis. And so that was the reason why I went to Levy.

Grung Moe:  The other reason was while working on shadow banking was that I had then for a while, for several years actually, worked on crisis resolution policies and lender-of-last-resort resort policies in Norges Bank. And these issue came up again and again. And, I mean, obviously I read budget and studied the previous crisis. And then the more I thought about it, I felt that there was some tension in the way the official policy was portrayed and the demands from the market. And rereading my paper now, I actually I'm surprised how well it stands by the time since it was written. Because one of the question I posed was that central banks need to be very careful not to be dragged into further operations. This was written in 2012, analyzing the various alphabetic soup facilities that the fund created at that time.

Grung Moe:  This time, they have been even more aggressive and they've gone even further. And it's ironic that I ended one of my papers saying that central banks may have fixed the ‘too big to fail’ problems for financial institutions but they may be dragged into another market maker of last resort operations that they are not so willing to do. I mean, and I think the events has sort of indicated my conclusion. And the issues are more relevant than ever as we have discussed on your show previously. And it really is a how far should the Fed go in terms of validating markets? And what are the limits? And I discussed this in the paper, including the collateral issues, which is sort of as Paul Tucker has pointed out is it's a bit of an inconsistency because central banks argued that all their operations should be collateralized.

Grung Moe:  But if you look at the extent of operation or of liquidity support, obviously you have to glide on the quality on collateral in order to meet the demand of the market. And so my reflection was that somehow markets may be running ahead of us. And obviously in a crisis, it's very difficult to do anything else than what the Fed has done. And they've gotten great praise for what they've done, being so aggressive. But I think the lessons from my paper, and also inspired by Minsky, is that maybe we need to think about the way we structure the financial system so that it doesn't happen again. I mean how can we get to more robust financial system without this need for market maker of last resort happening over and over again? That was the gist of the paper.

But I think the lessons from my paper, and also inspired by Minsky, is that maybe we need to think about the way we structure the financial system so that it doesn't happen can we get to more robust financial system without this need for market maker of last resort happening over and over again?

Beckworth:  Yeah. Very interesting paper. And we'll provide a link to it on the show notes. But when I read it, it just seemed very, almost prophetic that you were outlining these problems and they re-emerged here in this crisis on an even larger scale. I mean, the Fed had to step in, dollar funding was under stress around the world. And if anything it's just strengthened the whole of shadow banking system. So there is some need for thinking through how we deal with this in the future.

Grung Moe:  Can I just add a point?

Beckworth:  Yes.

Grung Moe:  Because there are two versions of the paper. One was the original working paper. And then there is another one published a fair deal later on. I think the development I had, I mentioned to you that I worked on several committees in the ECB and in Europe on defining shadow banking, how to get better insights and so forth. And one of my realization was that the initial distinction between banking and shadow banking was false or misleading. And many others have since pointed this out and worked on it. These systems are intensely integrated. And it would be mistaken to separate shadow banking from the banking industry as such. And it relates much more to what Mohammed Singh and Peter Stella actually wrote about way back that there is this collateral space, which is comprised of repo transactions of rehypothecation favorable bankruptcy rule, et cetera, et cetera, that actually facilitate this development. And so we need to look at it as a coherent whole, rather than separate entities or separate issues. So that brings me back to the sort of the need for regulating banks as well as shadow banks.

Beckworth:  Yeah. We just had on the show, a previous guest Carolyn Sissoko, and she has written a paper on this very issue with how the...

Grung Moe:  Yeah. She is very good. I haven't heard that show. I'm going to listen to it.

Beckworth:  So Carolyn has a paper where she talks about the history of the money market, how it's evolved from an unsecuritized largely federal funds basis to almost entirely repo based money market. And what that has done is the very point that you've just raised about the importance of collateral and has made shadow banking and commercial banking tied. And so we will provide a link to that show as well but she completely agrees with the point you just mentioned, you need look at the challenges there.

Beckworth:  All right. Well, let's move on to the main focus of our conversation today and that is your paper on Marriner Eccles and the Federal Court in 1951. And it's a great paper, a lot of interesting stories in there. You cover his policy work, both his early work, before he was at the Fed and then at the Fed. But I'm curious, how did you get into this topic at all? What led you down the path to want to look at Marriner Eccles?

The Path Toward Studying Marriner Eccles

Grung Moe:  Well, yeah. No. That's a good question because it was absolutely not intended. I was intended to write something about Minsky.

Beckworth:  Really?

Grung Moe:  And I ended up writing about Eccles. But the story goes like this. I started out with writing about shadow banking and fragile financial structures. And that actually led me to look at narrow banking as an issue. And then I stumbled upon Henry Simons and Irving Fisher as you know. And there was a coincidence because Minsky did his undergrad work at Chicago in mathematics actually. And then he moved on to the economics faculty. And the economics faculty at that time comprised of famous economists, like Paul Douglas and Viner and Oskar Lange but also Frank Knight and Henry Simons. And Simons was actually one of Minsky's teachers. And he admired him a lot even though they developed quite different theories.

Grung Moe:  And then before the Eccles paper, I actually did another paper on reviewing Simons’ famous ‘Rules versus Authorities’ paper which as you know is sort of very key reference for together with Kydland and Prescott for the timing consistency discussion, and found there that Simons actually made strong references to the need for control of finance before you could have a viable monetary operating system. Anyway, that's a different story. But while reading about Simons, I also stumbled upon the discussion of the Chicago group for active fiscal policy in the early 30s. And this was interesting because that was at the time when Keynes actually advocated open market operation while visiting Chicago. But that Chicago group had written in 33 and 34 papers actually advocating active fiscal policy to get out of the depression.

Grung Moe:  And so through that work, I stumbled upon Eccles because then there were references to his statement in Congress in 33, which I've found fabulous. I'm going to come back to that. And so I started reading about the guy. And then, today we have the St. Louis Fed files. So it's an easy way to get into FOMC minutes and all that. And it started me on a journey which I really, really found very interesting. In addition, it related so closely to the critical discussion at that time of the need for more active fiscal policy. I mean, you might recall that there was after the crisis a drive for active fiscal policy that was aborted because everybody thought we were out of the crisis. And I think it was in 2011, 12 that people or sorry, countries sort of retreated and focused more on monetary policy. So all in all, I mean, that was the background for starting on Eccles.

Grung Moe:  Eccles is a fascinating and rather special story. He became governor of the Federal Reserve Board under FDR, Roosevelt. But he was not destined to that in any sense. His father was a very, very poor Scotsman who came to the US on a Mormon grant. They were shipped to Utah where he started in lumber business and built up a fortune during his lifetime. He died when Marriner was 22. Marriner took over part of the business but eventually took over most of his business and became a very prominent business person in his own. And during the early days of the depression, he became famous for having saved his banking empire, or banking conglomerate, one of the few actually who survived in the West. And so that was his background.

Beckworth:  I've got a question about that.

Grung Moe:  Yeah. Sure.

Beckworth:  So he was the oldest of well, nine siblings. He came from a Mormon family, so there were several wives involved.

Grung Moe:  Exactly.

Beckworth:  There was nine of his siblings from his mother then he had 12 other siblings from another wife. But he was the oldest so he took over the business, is that right? Because he was the oldest of all the children.

Grung Moe:  He only took over I think, two or three seventh or something. He took over a minor part. But his business instinct was so much better that he ended up taking over the whole. But there are some stories in one of his biographies about how he was determined and aggressive in his early days. He purchased Sego Milk Company that started his sort of fortune. And it's a fascinating story. I mean, really a wheeler dealer and a very, very clever businessman.

Beckworth:  Yeah. And you mentioned that he started the first bank holding company in the United States. So he built up his own little banking empire out West. And his banks actually survived the Great Depression. His banks did not shut down. But that's an interesting segue into his introduction into thinking about the great depression. So it was really neat reading how he observed his clients, people in his community, and they were all struggling. And he came to a theory of business cycles. And it struck me. Why him? Why did he come to this conclusion? I mean, again, he was observing the pain and the suffering around him.

Beckworth:  I wonder though if many people back then were thinking about this. I mean, if you're living through the Great Depression, you're trying to understand why, why all this pain and suffering. I imagine others. But he unlike others formulated an idea. And probably the most fascinating part of this paper. He was like Keynesian before there was Keynes, right? He believed in countercyclical macro policy before Keynes wrote his work.

Eccles and Countercyclical Monetary Policy

Grung Moe:  Yeah. That's true. But as I alluded to with Henry Simons and the Chicago school, he didn't operate in a vacuum although he was not an academic. And there were questions as to whether he read anything about those statements from the Chicago economists. But I think there is a combination of two things. One is, he had a very strong work ethic and a very strong moral sentiment. He was very righteous. And so I think he reacted when... And he was very active in charities. So during the depression and Utah in particular, he observed how they tried to do their best. But it just didn't, it just wasn't enough. And so that was part of it that he sort of gradually recognized that somebody else has to sort of get the things sorted out. And his answer was the government needs to step in.

Grung Moe:  In terms of the analytics, I think there is some indication that he had read some of the underconsumptionist theorists. I don't recall the names but these were pamphlets that circulated in the late 1920s and early 30s. And there are indication that he had read some of this. So he was sort of developing his views on counteryclical policies in terms of the state having to compensate for shortfall in private consumption. But in a sense, I mean, these days there is a lot of discussion about MMT and Modern Monetary Theory. I would actually say that some of his views are in anticipation of some of that MMT stuff because he clearly had a balance sheet perspective on how the economy works. So that was interesting.

These days there is a lot of discussion about MMT and Modern Monetary Theory. I would actually say that some of his views are in anticipation of some of that MMT stuff because he clearly had a balance sheet perspective on how the economy works.

Beckworth:  Yeah. You mentioned, he testified before Congress in the early 30s. And one of the concerns he had is he really disliked FDR's calls for a balanced budget. And I mean, he really pushed back, in fact, you mentioned he was called a socialist because of this. But again, if you look at his background, he comes from kind of very, as you mentioned, very righteous man, you take care of yourself, you work hard, you do things right. And everything works out. And he saw that wasn't happening in the early 30s. So you begin to think broader and maybe he read these pamphlets as you mentioned. But he had a view of a business cycle, a counter cyclical view of macro policy for the business cycle.

Beckworth:  And it was just interesting to hear him in his own words. Because you quote him, I'm going to read this, that he understood the fallacy of viewing a government budget as a household budget. And I'm going to quote him here from your paper. He says, "We borrow from ourselves and when we pay interest on our debt, we pay it back the principal to ourselves, we are paying ourselves." And he goes on. And so you talk about how he understood how government finance is different than household finance, which must have been very original the timing. Were other people making this point or was he kind of unique and making this argument in the early 30s?

Eccles’ Pioneering Views on Government Finance

Grung Moe:  I think he was somewhat unique. Although again, some of these thoughts were around in the academic circles but I don't think he was very much aware of that. But no, he was somewhat of a character. And I would say that, I mean, you could ask a question why Eccles? Why Eccles today? I mean, why bother? But I think rereading Eccles is so inspiring for our current situation whereas you'd rather say your situation because with the country in the pandemic and the Congress sort of stalemate and discussions about support measures and stuff, let me just quote what he said to Congress in ‘33. And I should add that he was called as a witness at the end sort of and all the others 120 something was prominent business people, everybody saying that we need to balance the budget to create business sentiment that's good for investment.

Grung Moe:  And here comes this millionaire or billionaire from the West and making these statements. And the reason they are interesting is that they could and should actually in my view be relevant also for today. And I just list them very quickly. He said first, "Provide ample funds for all states to be used for the destitute and the unemployed." Two, "Allocate funds for public works to set this companies and states on a liberal basis at low rates." And then he had a point on agriculture pricing and production which is not relevant today. Fourth point was, "Refinance mortgages on increased scale at long-term basis with low rates." And finally, and this was related to the interwar settlement of debt, "A permanent settlement of the sovereign debts on a sound basis, cancellation being preferable." I mean, all of these are really, really something that should be applied today in the current situation.

Beckworth:  Very radical for back then though, right? It was a very radical view.

Grung Moe:  Very radical. And as you can imagine, and again, imagine he was at this time still in charge of his business empire I should say. And his shareholders weren't absolutely happy with his views obviously. And he was a Republican by the way. I mean, by party affiliation, not active. So eventually he went to Washington and obviously there were people around FDR who pick up his views and the fact that he was a prominent business person made him all the more interesting, because it wasn't some weirdo coming out of the West. It was a really, I mean... I think he, the richest person west of the Rockies at the time.

Beckworth:  So he wasn't some academic in the ivory tower coming up with some crazy radical theory. He was a capitalist. He was a capitalist, a Mormon, a conservative, very much a righteous man of the faith. And here he is with these radical views back then, very radical.

Grung Moe:  But he was a capitalist with the right heart at the right place.

Beckworth:  Yeah. Heart in the right place. Yeah. So just to reiterate, so he came to a view that there's a place for countercyclical macroeconomic policy. And you mentioned he had a term, a phrase, he said, "Government needs to provide a compensating force in the economy." So, I mean, it sounds very much like probably a modern view of countercyclical macroeconomic policy. And I'll also mention, even though he called and we'll get to this in more detail later in the show, but even though he pushed back against FDR's calls for a balanced budget, he ultimately believed in balancing over the business cycle, right? Balancing the budget over the business cycle. So he wasn't just let's run budget deficits forever. He was saying, look during a recession, a downturn, you want to do that.

Beckworth:  So he had a nuanced view. And finally, the other thing I want to highlight before we move on to his career in DC is that his view of the Great Depression. So it was a view about aggregate demand being a shortfall. But he had a unique view in that he stressed that this collapse in demand was tied to the overextension of credit, which in turn, was tied to income inequality. And when you're reading this, you're like, man, this is like a 1930s version of Sufi and Mian and their book on Housing Debt and the collapse in 2008 crisis. So he sounded very similar to what many people were saying in what was going on in 2008. Which again, it's just interesting to see someone way back then making these points that were echoed again in the last crisis.

Grung Moe:  But again, I would say it's even more sort of relevant today than in 2008 in the sense that the disparities and income distribution has worsened even more. And [Eccles] made the point, actually. Mind you again, he was super rich. So he was actually advocating policies that would hurt himself but he was advocating strong, progressive taxation. And he made the point that income going to the rich doesn't generate consumption because they save so much. So, I mean, there is no, effective demand coming out of them anyway. I mean, looking from a macro perspective. So he had very progressive use absolutely. And again, they're I mean, very relevant for today.

I would say it's even more sort of relevant today than in 2008 in the sense that the disparities and income distribution has worsened even more. And [Eccles] made the point, actually. Mind you again, he was super rich. So he was actually advocating policies that would hurt himself but he was advocating strong, progressive taxation. And he made the point that income going to the rich doesn't generate consumption because they save so much.

Beckworth:  One more thing about his personal life before we move on is that vice chair of the Federal Reserve, Randy Quarles is related to him.

Grung Moe:  I know.

Beckworth:  Right? That Randy's wife is an Eccles. Is that right?

Grung Moe:  His wife is a grand niece of Eccles. I heard that the other day.

Beckworth:  Yeah. So interesting. Coming full circle here, we have an Eccles.

Grung Moe:  Actually, can I interject one point there.

Beckworth:  Yes.

Grung Moe:  Because there was one thing that it's not prominent in my paper, which I discovered rereading now preparing for this is that one of the things Eccles was very strongly in favor of was unitary banking. He was very upset by the division of responsibility for supervision between OCC and the Federal Deposit Insurance Corporation and the Fed. And he tried over and over again to get FDR to allow him to sort of do something with this in Congress. But FDR didn't want to take sort of the battle. I mean, he had enough to deal with. But this is again related to I guess his new position in the Fed is the vice chair for supervision, right?

Beckworth:  That's correct.

Grung Moe:  So it sort of just reminded me of the-

Beckworth:  Yeah. I know. It is interesting.

Grung Moe:  ... never ending discussion about supervisory responsibility in the US. Anyway.

Beckworth:  So vice-chair Quarles is both fallen in Mariner's legacy on many levels. He's at the Federal Reserve, he's engaged in banking regulation and concerned about the similar issues. So it's fascinating to see this connection there and how it runs in the family. And of course the Federal Reserve building is named the Eccles Building after him. So fascinating backstory but let's move on to his actual career in DC. So we already mentioned, he came and gave testimony as a businessman. And that kind of put him on the map. But tell us, how did he get into FDR's government? What pulled them up there? What role did he play? And how did that provide a segue into the Federal Reserve?

Eccles’ Government Journey to the Fed

Grung Moe:  Yeah. After he gave his testimony, he went up to New York and met some of the people connected with FDR included Tugwell and some others who were close to FDR. And they discussed primarily without any commitments to anything but then he went back to Utah and there he listened in dismay to FDRs continued preaching of balanced budget but he couldn't do much with that. And then eventually he was called to meet some of the same people again. So he went back and had meetings. And what finally emerged was an offer to join in the Treasury under Morgenthau. And he said, well, he wasn't really prepared to give up his business interests. And so he went back and sorted out things with his brother and so forth. And then he was appointed assistant to the Treasury secretary in 1933, four or something. I don't recall exactly the date.

Grung Moe:  And there initially, he was asked to do sort of odd pieces of work within the ministry but soon he was heavily involved in the new Housing Act. And that was interesting from a banking perspective because it sort of opened up the potential for commercial banks to get into the mortgage business. And before that, there had only been balloon loans. And then they sort of, I mean... Actually there was an assistant to Mariner Eccles called Currie, Lauchlin who actually invented the mortgage in a sense and enabled commercial banks to go into mortgage business on a wide scale.

Grung Moe:  And while working on that, he met FDR in a couple of occasions. And then at one point he said he heard rumors that he was considered for the post of the vacant governor of the board of Federal Reserve. And eventually he met with FDR who told him, "Well, Marriner, are you prepared to take the post?" And he refused flatly and said, "I wouldn't touch it at all unless there are major reforms made to the system." And FDR got intrigued and asked him, "Well, what's your proposals?" And so he said, "Give me a couple of days." And then he went back with a proposal that eventually emerged as the Banking Act of 1935, title two of Banking Act. And so that was the way he ended up in the Federal Reserve.

Grung Moe:  I should add that as you know Senator Glass was the original founder of the Federal Reserve Act in 1913, he was still in the Senate. And there were two unfortunate incidents that sort of midlife a bit miserable for Eccles. One was that FDR when nominating him for the post of governor, failed to inform Glass beforehand and Glass was very upset about this. So he said, he's not going to get the post, over my dead body. And the second was in terms of the 1935 banking act and changing his baby legislation. That was sort of also to be a difficult process because concrete to Eccles' promise of showing him a draft legislation, the legislation was made public before either of them had seen it or the draft publication. And Glass was heavily upset.

Grung Moe:  So it was a tough fight to get it through Congress. But just on the substance, I mean Eccles' point was at the time the district Federal Reserve bank actually had the upper hand and the board was, really, really not a very strong body. And that was indicated by one of the governors actually choosing to go back to his regional bank rather than staying in Washington. So it didn't really have much influence on monetary policy, if you could call that monetary policy at all. It wasn't really centralized. And so the key changes that Eccles proposed was to concentrate power in the hands of the board. And obviously, again, this was resisted by the regional banks as well as something called the advisory Federal Reserve Board or committee, which was private bankers from the regions advising the board.

Grung Moe:  And they said, "You can't do this." And Eccles just said, "This is what I'm going to do you like it or not." So we get this new system, which is sort of carried forward to these days of open market operations being centralized at the board and the open market committee, the authority to set reserve requirements also with the board and the new collateral policies, which by the way were quite instrumental in financing quite a bit of the war effort in terms of the treasury being introduced as new collateral for monetary operations.

Grung Moe:  So that's how he ended up there. And actually there was a complete new board established with new candidates. And everything was eventually approved by Congress. But again, as we have seen over and over, I mean, the establishment of the Federal Reserve in 1913 as you know again, is a close race between different factions and a lot of infighting. And here again, there was a tied vote for Eccles as governor, which was eventually tilted in his favor and the banking law title too was only accepted by Congress after a direct intervention by FDR. So all of these sort of hanging in a balance often.

Beckworth:  Well, it's fascinating to read the story because he helped redesign the Fed effectively. He made the Fed what it is today, more or less. And then he went on to run it. He wasn't just a governor. He was chair from 1934 to 1948. So imagine designing an institution then you get the helm, you're in charge. You get to lead it. So fascinating.

Grung Moe:  Absolutely.

Beckworth:  I mean, and it is. This history we got to move on. But the history is so neat here that the regional banks used to set monetary policy, right? So the famous story of Benjamin Strong being pivotal to the early fight in the Great Depression, he dies, what do you do? There's no central leadership. So this is one of the reasons that Marriner Eccles wanted to consolidate power in DC. So he got the power in DC. He got more securities, the collateral point you mentioned, and pulled the power away from the regional banks. You also mentioned, he was concerned about New York banks having a lot of power and trying to bring it all to DC.

Beckworth:  So he's made it to office. He made it through Senator Glass who he irritated. The next part of the story is getting us... So we get through the Great Depression. We're still in the Great Depression technically until the end of in the 1930s, World War II starts. But we're getting near the end of the Great Depression and financing for World War II becomes an issue. So talk about war financing and the Fed's support of it and how it led eventually to this interest rate peg.

The Fed’s War Financing and Eventual Interest Rate Peg

Grung Moe:  Well, the peg as you know has become more relevant lately because of the recent policies enacted by many central banks of use control. I mean, initially by bank of Japan and then eventually by others. And I don't think many had heard about the World War II peg before that or at least hadn't been that much interested in it. And again, as an aside. I remember when I started in the central bank in the mid-80s. The thinking was that you control the short rate and then the market decide the yield curve. But as you say, during the initial years of World War II, ‘42, there was an agreement between the Fed and the Treasury that they would finance their paper at given prices.

Grung Moe:  And so I think the short end was three eighths. And then the long rate was two and a half. I think Meltzer in his book about Federal Reserve actually discussed this and asked, "Why two and a half?" Because UK had three at the time. Keynes was again famous for writing about this, *How to Finance the War* which is an interesting pamphlet again related to this issue. And Meltzer also alludes to that there was no formal agreement actually as two and a half. It was sort of more of a tacit understanding. But it became the norm. And then the other issue was how much to finance with taxation and how much with bond sales.

Grung Moe:  And this was where there were differences between countries. And I don't recall the exact proportions but again, in the UK, they had a larger proportions of taxation than in the US. And in addition, they had a larger proportion of bond financing to the public whereas in the US a lot of the financing ended up being financed by banks. And so Eccles eventually started being concerned about the buildup of excess reserves. Again, you could sort of do a parallel to today in quantitative easing where the same discussions goes in terms of the inflationary consequences of excess reserves. Eccles started being concerned about this early on in 40s, much earlier than anybody else.

Grung Moe:  And he started talking about it as well. And they were discussing various ways to sterilize by introducing new reserve requirements and so forth. But contrary to many who were afraid of a contraction after the war, Eccles was and rightly so concerned about inflation and excess demand. And he actually had a lot of figures and speeches about excess liquidity building up in the system, and what would happen eventually. And he made the point that the need for controls was even larger after the war, immediately after the war than during the war to counteract these inflationary forces.

But contrary to many who were afraid of a contraction after the war, Eccles was and rightly so concerned about inflation and excess demand. And he actually had a lot of figures and speeches about excess liquidity building up in the system, and what would happen eventually. And he made the point that the need for controls was even larger after the war, immediately after the war than during the war to counteract these inflationary forces.

Beckworth:  Wage and price controls?

Grung Moe:  Yeah. They were obviously in effect during the war. But I mean, without getting into too much detail, you have the transition to a new precedent and Truman was pressured from many sides. And Eccles specifically was in favor of continuing the excess profit tax and also retaining some of the price and wage controls until the situation had calmed down. But due to political pressure, Truman was sort of forced into abandoning these and the immediate result was a hike in inflation which sort of indicated Eccles' views.

Beckworth:  So Eccles was concerned that as long as the Fed had to continue the interest rate pegs, and you mentioned long-term pegs or bond at two and a half percent, and then treasury bills a three, eighth, or 0.375%. As long as the Fed had to continue supporting those pegs after the war had ended, he was concerned about inflation, that they were creating all this support for fiscal policy and monetizing the debt. And there would be this inflation takeoff. So as long as the Fed was doing that, and as you said, he wasn't comfortable doing it but as long as the Fed was doing it, then he felt there should still be offsets in terms of wage and price controls and profit taxes. But he didn't get those because of political reasons. And just one little side note on this, there is an act, the Second War Powers Act of 1942, which you noted in your paper. And this act allowed the Fed to buy directly from the treasury. So it can direct kind of...

Grung Moe:  Article 14B.

Beckworth:  Yeah. But the thing is it lasted, which was interesting until 1981. That power wasn't removed in 1981. And I think this is also an important lesson for today as well from this story. It's a small one but last year in September when we had the repos rate spike, when some of the plumbing issues came to a head from the operating system and bank regulations, one solution that George Selgin proposed was allowing the Fed to buy directly through a repo facility from the treasury, at least in emergency times to kind of take off some of this pressure. It would have solved some of the problems.

Grung Moe:  And in having this conversation, I talked to some people from Canada, some officials there, and they noted that the bank of Canada actually buys a small percent of all the new debt issue, which is fascinating. And I think that kind of helps the plumbing some, I mean, that's the argument, it facilitates activity there. And the Fed could do this up until ‘81.

Grung Moe:  And you could add that the recent change in the operating procedure of Bank of England also facilitated direct purchases although on an ad hoc basis. But yeah, I make the point in the paper. And as you've read the whole thing, I mean, one of my concern and one of the motivation for writing the paper was that, I read a lot about central banking independence, and all these things and collateral policies. And as you have noted previous on your show, you had a good discussion on collateral policies in the US and the Eurozone. And as I write, there are structural differences between countries, Japan, Europe, and us and the UK, that sometimes has an impact on what is the right setup. And again, on central bank independence, Eccles' point was that these things, and as I concluded my papers, shouldn't be set in stone. I mean, there are some general principles. But, I think we should be careful of not becoming overly doctrinaire and too rigid in our policymaking.

Grung Moe:  And so my conclusion and following Eccles as you have read is that, central bank policies should be adapted to the circumstances and not necessarily be cast in stone. I have some quote from Peter Praet formerly with the ECB where the treaty has sort of put these principles in stone to never be touched despite the cyclical circumstances, which I think is crazy. I have to say that. And so again, these are sort of issues that I think are open for discussion. And as you said, that could become a crisis situation where you should open up for direct purchases if that's the way to save the system. Yes.

I think we should be careful of not becoming overly doctrinaire and too rigid in our policymaking. And so my conclusion and following Eccles as you have read is that, central bank policies should be adapted to the circumstances and not necessarily be cast in stone.

Beckworth:  Yeah. Absolutely. I mean, I want to be clear, there's a danger and this is the concern and why you don't see it today in the US is that you don't want the Fed buying up debt all the time from the treasury on a sustained basis. But I think George's suggestion was in emergencies, you have a facility that opens up and would allow this to happen. So you're right. You need to set it according to each country's unique situation. But nonetheless, an interesting side story that the Fed could buy directly from the Treasury up through 1981 from this period. Which today it seems just so foreign, so different than what we do.

Beckworth:  Okay. So we have the situation emerging here, inflationary pressures are building, the Fed's getting concerned. And Eccles is echoing his concern. What happened to Marriner Eccles that he lost his chair position in 1948?

Eccles’ Post-War Exit as Fed Chairman

Grung Moe:  Yeah. I mean, just to comment on the accord I mean, I have some quotes there. People saying it's the biggest battle in central bank history. And the story in itself without regard to the policy implication is just fascinating but a lot in politics is. I mean, just to state the facts first. Eccles was a chairman of the board and then when FDR died and Truman came on, he went to Truman and sort of offered his position and said that, "I can understand if you want to have a new chairman that you would designate yourself." And Truman said, "No. I want you to stay on." And then time went by and Eccles became more vocal in his opposition to this inflationary policies after the war.

Grung Moe:  And without really any warning, he was told that his position wouldn't be renewed. And he was very upset and he asked to have a talk with the president. And Truman was clearly sort of uncomfortable and didn't really want to give him a straight answer. But there are various stories about that. And one is that he always sort of was a bit of a provocative person with his views of people, could use that as an argument. But there is another story which is a side story related to his banking supervision practices. There was a banking conglomerate on the West in addition to his own that was a bank Transamerica, the parent company of the later Bank of America.

Grung Moe:  And he had been pursuing regulatory action with them for many years. And there was great tension. And many of Truman's friends had relations to this company. So there are some speculation that that could have been one part in the Truman's decision. Another one which is probably more likely is that there was at the time of this supervisory issue hearings in Congress where Eccles testified. And they pushed him on his business holdings and his business relations. And definitely Eccles had divested a lot while becoming chairman but he still retained some business interests out West.

Grung Moe:  And Truman wrote a note never to be released to Eccles but since found in his library where he actually noted that Eccles spent too much time with his business dealings and had a potential conflict of interest that was enough for him to lose that position if not more. So I think that may be the more... So it's sort of interesting. Anyway, he was told that he would not be renewed as chairman. And then as you know the interesting twist of this story is that people then expected him to leave the board-

Beckworth:  Yeah. But he didn't.

Grung Moe:  ... but he didn't. He was offered informally the vice chair position by Truman. And he said, "I would accept that." But that offer never materialized. And so eventually, Eccles decided to stay on the board as a regular member and asked Truman to have his name withdrawn as candidate for the vice chair, which was never filled anyway. So contrary to what many expected, he continued on the board and up until 51, which will come to when he was…

Beckworth:  Yeah. Now, this is fascinating because you couldn't imagine anyone doing that today. Right? Like, for example, when Paul Volcker kind of lost his role as chair, he left. He had time left on his, I believe his term. But why would you stick around after being a very influential chair and then someone else takes that role?

Beckworth:  So Thorvald, this has been a very interesting story and we need to actually get to your lessons from the Treasury Accord. So just to summarize what happens next. So Eccles loses his spot. President Truman appoints Thomas McCabe and he ends up disliking Thomas McCabe as much… you have a point in there where you mentioned that president Truman was disappointed in him.

Beckworth:  And actually there's another lesson here we can spend time on. But president Truman asked Thomas McCabe to resign which kind of has echoes of president Trump and Fed chair Powell, the tension there. So it wouldn't be the first time a president has asked the Fed chair to resign. But moving on forward, we find there's this tension. The Fed and the president think they have an agreement. The president releases or the Treasury secretary releases a speech where he says the Fed is going to continue to support Treasury's policies. The Fed gets upset. And in fact, Eccles plays a role here. He releases a letter and comments the newspaper, which really kind of builds momentum.

Beckworth:  And eventually anyhow, we have the 1951 Treasury-Federal Reserve Accord where the Fed breaks way from the treasury. And we have this glory story of independence, and independence is achieved. There's a lot more to this story there. You can read it in the paper. But what were the lessons you took away from this, both this particular incidence and more generally the lessons from Marriner Eccles’ life? What, what should we take away? Because there is the standard story about the wonderful independence of this ‘51 agreement. But there's a broader story you want to tell. So tell our listeners what it is.

Lessons from Eccles’ Life and the Treasury-Fed Accord of 1951

Grung Moe:  Yeah. No. I mean, the first, Eccles is just a fascinating person. And as I said, I think his lesson's broader than central banking is applicable to the current situation. And his 1933 testimony for the Congress is really worth rereading. But regarding central banking, I think it's interesting that there was quite a different lesson drawn from the accord. My point has been that the accord has often seen as sort of the basis for current central bank independence policies. I think that is too narrowly defined. And Eccles proves the point that there is a border issue here in terms of adjusting the policies to fit the cyclical situation.

My point has been that the accord has often seen as sort of the basis for current central bank independence policies. I think that is too narrowly defined. And Eccles proves the point that there is a border issue here in terms of adjusting the policies to fit the cyclical situation.

Grung Moe:  And also I think there is the underlying issue of coordination between the treasury and the central bank, which is something that has been created in the literature a lot of central bank independence. But I mean, again, reference to Woodford and the Sargent and Wallace paper which sort of seems to indicate that if you can balance the fiscal budget, the central banks can be left to sort of control the price level. But that is again I think too narrow view. And recent speeches by including Woodford actually at the ECB Research Conference the other day, I think now realizes the need for, or recognizes the need for active fiscal policy, at least in the current circumstances. What more? Actually one of my conclusion is that may be nominal GDP targeting is a...

Beckworth:  Yeah. No. Hey, I love it.

Grung Moe:  This is delusion. And I actually had forgotten that until I read it on page 67 of my paper, which I said, "David would like this."

Beckworth:  Do you think Marriner Eccles would support nominal GDP targeting. Is that consistent with his view?

Grung Moe:  Yeah.

Beckworth:  Okay.

Grung Moe:  I actually, I do think so. I mean, his view of compensatory policies would clearly be a variation of that. When I quote in the paper is somebody else. I think Franco or somebody who has a nominal GDP target of some four or 5%, which I think also is consistent with the current discussion of maybe, you should allow for more inflation. I mean, ref the recent revision they've had of overshooting. Another important lesson again inspired by Minsky is that, and going back to the shadow banking discussion is you won't get any stability if you don't have some better control of the financial system. I think Benjamin Friedman actually made the point after the previous crisis that we need to have a serious look at the financial system, whether it allocates capital adequately.

Another important lesson again inspired by Minsky is won't get any stability if you don't have some better control of the financial system.

Grung Moe:  And he was sort of saying, we need to look at this pragmatically. If the current system is the way we want it to be or not. And I think that for me is an important issue. And for those interested, they can read the shadow banking paper for more detail. And then finally, what should I say that again, monetary policies should not be set in stone. I mean, this is something that history again has shown over time. And I think there is a quote from an economist historian who says, "The present form of central banking is certainly not the only viable institutional solution." And the same goes for debt monetization. I mean, if you look at history, this goes in cycles. So my view is that Eccles has very important lessons for us in central banking policies specifically but more widely. So for economic policy and he should be read and you can find more detail in my paper.

Beckworth:  Yeah. It's a great paper. And we will again provide links to it in the show notes. I encourage our listeners to take a look at it. Well with that, our time is up. Our guest today has been Thorvald Grung Moe. Thorvald, you so much for coming on the show.

Grung Moe:  Thank you. Thank you so much, David. It's been fun.

Photo by Olivier Douliery

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.